Heritage Global Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; comparisons are to the corresponding 2017 periods. Amounts are in U.S. dollars. Heritage Global operates one segment, asset liquidation, providing auction, appraisal, advisory, asset disposition and charged-off receivables brokerage services.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $5.13m | $4.74m | $17.76m | $14.55m |
| Operating income | $0.42m | $0.32m | $3.45m | $0.74m |
| Net income | $0.37m | $0.08m | $3.34m | $0.14m |
| Diluted earnings per share | $0.01 | $0.00 | $0.12 | $0.00 |
| Operating cash flow | Not separately provided | Not separately provided | $4.37m | $1.84m |
| Adjusted EBITDA | $0.57m | $0.45m | $3.91m | $1.16m |
- Q3 gross profit on services and asset sales was approximately $4.2m, about 82% of revenue, versus $3.9m, about 83%, a year earlier. Nine-month gross profit was $15.0m, about 85% of revenue, versus $10.7m, about 74%.
- Cash and cash equivalents were $3.23m at September 30, up from $2.11m at year-end 2017. Total assets were $15.03m; stockholders’ equity was $7.12m.
- Working capital remained negative at approximately $2.1m, improved from a $5.6m deficit at December 31, 2017. Current assets were $4.76m and current liabilities $6.86m.
- Total debt was $0.91m, down from $1.52m at year-end; it included $0.37m current and $0.54m non-current third-party debt. No borrowings had been drawn on the new $1.5m bank revolving facility as of September 30.
Changes versus prior periods
- Q3 revenue rose 8% year over year, led by services revenue growth of 16%; asset sales revenue fell 54%. Nine-month revenue increased 22%, with services up 30% and asset sales down 29%.
- Nine-month operating income increased to $3.45m from $0.74m, and net income to $3.34m from $0.14m. Management attributed stronger gross profit partly to higher deal volume at Equity Partners and NLEX, which generally have lower direct costs than HGP. Results also depend on the timing and size of discrete transactions.
- Nine-month SG&A increased 16% to $11.32m, principally due to higher compensation and commissions at HGP and NLEX, plus increased advertising and travel; lower consulting expense partly offset the increases.
- Operating cash flow rose to $4.37m from $1.84m. Financing cash outflow was $3.17m, largely reflecting $2.62m of final NLEX contingent consideration, alongside debt repayments. Cash increased by $1.12m.
Liquidity, outlook and notable items
- Management expects the asset liquidation business to remain the primary source of operating cash and stated that current capital resources are sufficient for expected needs; it may draw on the bank facility if additional capital is needed. No quantified earnings or revenue guidance was provided.
- The September 2018 First Choice Bank facility replaced a related-party revolving line and provides up to $1.5m through October 5, 2019. It bears interest at prime, subject to a 5.25% minimum, is secured by company and certain subsidiary assets, and includes financial and other covenants.
- The Company completed payment of the NLEX earn-out during the period. A separate $1.26m promissory note arising from a January 2018 settlement of long-standing litigation is payable in installments through January 2021; the outstanding balance was $0.91m at September 30. HGI guarantees the subsidiary’s obligations.
- The Company reported approximately $73.0m of tax net operating loss carryforwards, but maintains a full valuation allowance against net deferred tax assets due to cumulative losses and uncertainty about future taxable income.
- Management highlighted transaction timing and magnitude, competition, regulatory compliance, and estimation uncertainty as relevant business considerations. It reported no material subsequent events, no material changes to previously disclosed legal proceedings, no off-balance-sheet arrangements, and effective disclosure controls.
Important facts for investors to verify
- Whether the higher 2018 deal volume and profitability can be sustained, given the company’s transaction-dependent results.
- The composition and timing of accrued liabilities, including auction settlement balances, and the path to resolving the working-capital deficit.
- Repayment terms and status of the $0.91m settlement note, and continued availability and covenant compliance under the secured bank facility.
- The extent to which reported earnings and cash flow reflect recurring operating performance versus timing effects, contingent-consideration adjustments and other noncash items.
- Related-party arrangements and the potential realization of tax attributes, goodwill and intangible assets.